Thursday, December 2, 2010

Economic crash with a silver lining?

Initial unemployment claims surged by 26,000 last week to 436,000 wiping out the happy talk about the jobs picture. Tomorrow’s monthly report is expected to show at least 80,000 new jobs in October but that of course is still far short covering the increase in population each month let alone any recovery. The number of unemployed youth unable to move out of their parents basement continues to grow and to age. This of course continues to worsen the US economy’s potential as the workforce continues to fall behind in education and job experience. But hey, serfs don’t need to know that much, and it makes them good Republicans.

Initial reports on the limited audit of the Federal Reserve mandated by Congress shows that they loaned $3.3 trillion to banks and a variety of corporations during the financial crisis. Much of it at 0.0078% interest, is an effectively zero interest loan, really a loan? BofA tapped the Fed overnight window heavily and they pledged ½ trillion in junk bonds to cover their short term loans totaling nearly 3 trillion total. These were called overnight loans but really ran for 30 days.

To define some jargon, “Junk bonds” are called that because they have no real assets behind them but are just a gamble that the company will be able to rob somebody else to pay you back before they go under. Trillions in junk bonds left over from the heyday of mergers and acquisitions will start coming due in 2012 as well as trillions in bad real estate loans. Just in case you were trying to time the big crash. The Mayans had it right.

This 3.3 trillion disclosed today doesn’t cover the entirety of Fed activity just the so called emergency loans. There was also the two trillion in QE that involved buying toxic assets for far more than they were worth, nor does it include trillions in what they call normal lending. The Fed and the Treasury made loans and guarantees totaling 23 trillion according to the Inspector General for the TARP program.

China has increased its imports of gold dramatically up 5 fold over last year and passing 209 tons in just 10 months, they are also the world’s largest producer of gold. India is still the largest consumer of gold at 600 tons per year but China is expected to pass them by as China seeks to protect itself from currency fluctuations and inflation. Gold is still far short of the inflation adjusted high price of 2300/oz set in 1980.

There is a viral internet rumor that JP Morgan is short selling 3.3 billion oz of silver. Short selling is betting it will go down in price and if it doesn’t you make up the difference to the people who actually own it. The Guardian of the UK is giving this rumor some credibility but I doubt that it’s so straight forward.

The scam is that the people pushing the rumor want everybody to buy silver driving up the price bankrupting JPM and forcing everybody onto hard metal “money” instead of fiat currency. A happy thought to be sure but JPM has probably hedged their bet with derivatives so I wouldn’t count on it working out the way we would like. In other words, I wouldn’t rush out and buy any silver unless you have no more room for canned goods. In these “interesting times” this could be the bubble that sets off the crash of the mega-banks and the economy in general or maybe it will just be a big fizzle.